The Month Ahead

International equity markets started March strong, with European shares hitting record highs. However, US markets faced a challenging month, with major indices like the S&P 500 Index and the Nasdaq Composite Index experiencing declines, as at the time of writing. This pull-back sent both indices into ‘correction’ territory – defined as a 10% retreat from their most recent highs.

The sell-off in US equities was driven by investor concerns over the impact of new trade policies and tariffs. President Trump’s aggressive stance on trade, including the imposition of new tariffs, heightened fears of inflation and potential economic slowdown. Meanwhile, Asian markets showed mixed results, with Japan underperforming while China’s Shanghai Composite Index was one of the better-performing global share markets.

In New Zealand, the market faced significant headwinds, hitting its lowest point in nine months. The NZX 50 Index has declined over 7% since the start of the year, driven by a combination of global and domestic factors. As well as the broader sell-off on Wall Street, the market has been impacted by weaker-than-expected corporate earnings. Key sectors such as healthcare, aged care, and real estate saw notable declines, with Fisher & Paykel Healthcare and Ryman Healthcare among the major losers.

In contrast, bond markets benefitted from a rush into a safe-haven investments. This saw bond yields fall, and bond prices rise.

The end of the one-month delay on certain tariffs (against Canada and Mexico) is set to come off early in April and has the potential to impact trade dynamics and create renewed volatility in equity markets. What’s more, Trump has announced new "reciprocal tariffs" will take effect on 2 April. These tariffs are designed to match the tariff levels and trade barriers imposed by other countries on US goods, with Trump emphasising that these are aimed at protecting American industries and workers from what he perceives to be unfair trade practices.

He’s threatened countries which fail to reduce their trade barriers with even steeper tariffs, which could lead to increased costs for businesses and consumers. However, he has said there may be a period of negotiation before any new tariffs are fully implemented, allowing trading partners an opportunity to adjust their policies. These developments will be closely watched.

Following the US Federal Reserve meeting on 18-19 March (where they kept interest rates unchanged and projected a growth slowdown), key economic data releases in April, such as the GDP report and nonfarm payrolls data, will shape expectations for the Fed’s next policy meeting in May. The Fed is expected to maintain its current interest rate stance, but any significant changes in economic indicators could influence future policy decisions.

In Europe, the European Central Bank (ECB) will hold its monetary policy meeting on April 16-17. The ECB is expected to maintain its current policy stance, but the meeting will provide insights into the bank's outlook on inflation and economic growth. Recent projections indicate modest growth of 1.3% for 2025, with high energy prices and geopolitical uncertainties weighing on the recovery.

In Asia, the focus will be on China's GDP report for Q1 2025, expected to be released in mid-April. China has set a GDP growth target of around 5% for 2025, with efforts to boost domestic consumption and investment.

The upcoming Reserve Bank of New Zealand (RBNZ) policy meeting on 9 April will be a key focus for local investors, especially as it marks the first meeting under the new Acting Governor, Christian Hawkesby. Following the resignation of Adrian Orr, Hawkesby has taken the helm and will chair the Monetary Policy Committee meeting. The RBNZ is expected to cut the Official Cash Rate by 25 basis points, aiming to support economic growth amid subdued activity data.

Recent economic indicators will however play a crucial role in this decision. New Zealand's GDP growth for Q4 2024, showed the economy expanded at 0.7%, a faster than expected pace. Meanwhile, inflation remains within the target range, with the latest Consumer Price Index (CPI) data showing an annual increase of 2.2% for December 2024. Labour market data, however, indicated a slight worsening in conditions, with the unemployment rate rising to 4.8% (from 4.6% previously), a near four-year high.

As we navigate these uncertainties, our investment strategy remains cautious. We maintain a neutral stance across global equities and bonds, balancing the potential for market gains against the risks of inflation and geopolitical instability. Our focus remains on diversification and risk management to protect and grow our clients' investments. We are closely monitoring developments in trade policies, economic growth, and central bank decisions to adjust our portfolios accordingly.